Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor with Bloomberg.
Speaker 1: This week, we're very pleased to welcome Johnny Fine, global
Speaker 1: head of investment grade Debt at Goldman Sachs. How are you, Johnny,
Speaker 1: I'm great, Thanks for having me, appreciate you joining us.
Speaker 1: So we're very excited to have you on the show
Speaker 1: and to get your thoughts on all things credit and weightlifting, sportslifting, powerlifting, cookery,
Speaker 1: all that stuff. Also devices to welcome back Arnold Kakuda
Speaker 1: with Bloomberg Intelligence. Great to see you and.
Speaker 2: Arnold, Oh, thanks for having me again.
Speaker 1: So just to set the scene a bit here, borrowers
Speaker 1: have been raising money at a furious pace this year,
Speaker 1: setting records across unibonds, leveraged finance, asset backed securities, and
Speaker 1: investment grade. A lot of that has been to refinance
Speaker 1: debt coming due or reprice existing foracilities, and it's not
Speaker 1: confined to publicly traded bonds and loan markets. Private debt
Speaker 1: and direct lending and asset based finance have also been
Speaker 1: going gangbusters. Investors are clearly keen. The FED has started
Speaker 1: cutting rates the expectation is for lower coupons ahead. And
Speaker 1: while spreads are very tight, all in, yields on high
Speaker 1: grade US corporate bonds are still close to five percent,
Speaker 1: so pretty attractive compared to history. Buyers seem to have
Speaker 1: a ton of cash, a lot of it sitting in
Speaker 1: short term money market accounts. Fun Flows have been extremely positive.
Speaker 1: That's made new issue concessions very tight negative in some
Speaker 1: cases last week. Also, a pretty bullish economic outlook is
Speaker 1: becoming the consensus, and that's supporting the buying that we're seeing.
Speaker 1: So I just want to bring you in, Johnny. I mean,
Speaker 1: I get the demand side, but on the supply side,
Speaker 1: why the rush where the extreme push right now? Why
Speaker 1: not wait till things get cheaper when the FED really
Speaker 1: does start cutting.
Speaker 3: Well, there's a.
Speaker 4: Lot to unpack there. So within that intro, I think
Speaker 4: emailed everything, but with one exception. And the one exception
Speaker 4: I think is when you said the expectation is that
Speaker 4: coupons are going to move lower, because I don't think
Speaker 4: that's the case at all. We've seen term yields probably
Speaker 4: at their low point, call it late August, early September,
Speaker 4: after the volatility, after the unwind of the end carry trade.
Speaker 4: After the oh my goodness, the Fed's behind the curve.
Speaker 4: They're going to have to do some emergency cuts to
Speaker 4: play catch up. And we hit what maybe three seventy
Speaker 4: three seventy five in tens then, and we're now back
Speaker 4: at four point fifteen today. Where term yields are is
Speaker 4: a function of not simply us beginning a cutting cycle,
Speaker 4: but really how deep and how fast that cutting cycle is.
Speaker 4: And there's been an incredibly robust relationship all year between
Speaker 4: where the market expects the FED funds rate to be
Speaker 4: in a couple three years time, So call that a
Speaker 4: proxy for the terminal rate, a very robust relationship between
Speaker 4: that number and tenure yields. In fact, you take that
Speaker 4: number and add seventy five basis points, you get ten
Speaker 4: year yields. Today that terminal rate a couple years out
Speaker 4: early twenty twenty six, there are thereabouts is three forty.
Speaker 3: Add seventy five basis points four point fifteen. That's where
Speaker 3: tens are.
Speaker 4: And that relationship has been so robust, and as the
Speaker 4: market has digested that, and as issuers have digested that,
Speaker 4: they thought about financing in a risk paradigm where you know,
Speaker 4: we may get rate cuts, But there's not necessarily going
Speaker 4: to be the case the term yields are going to
Speaker 4: move lower in lockstep.
Speaker 3: Far from it.
Speaker 4: So the original question that you posed to me before
Speaker 4: I went off at a complete tangent and addressed something
Speaker 4: else was why the rush and the rush really began
Speaker 4: in the first half of the year. And it was
Speaker 4: pretty clear and pretty evident to us all that we
Speaker 4: were going to have a very robust first half of
Speaker 4: the year, really driven by a corporate issuers desire to
Speaker 4: de risk and de risking ahead of more than fifty
Speaker 4: percent of the people will occupy this planet and live
Speaker 4: in democratic countries going through the polls, and that's a
Speaker 4: clear and visible risk. You never know where these elections
Speaker 4: are going to end up. You never know what kind
Speaker 4: of volatility they might introduce. But if you're sitting there
Speaker 4: and looking at you're financing needs over the course of
Speaker 4: the next twelve months and you see one, then you're
Speaker 4: probably not going to sit there and think, hey, I'm
Speaker 4: going to wait till October. You're going to finance early.
Speaker 4: You're going to get ahead of that. And by the way,
Speaker 4: at the beginning of the year, we had a heavily
Speaker 4: sharply inverted yield curve. When you have a heavily sharply
Speaker 4: inverted yield curve, the cost of carry of warehousing long
Speaker 4: term debt for a corporate is zero or in some
Speaker 4: cases actually negative and in naturally in a lot of cases.
Speaker 4: In March of this year, I think the number was
Speaker 4: something like sixty percent of all investment grade borrowers could
Speaker 4: issue ten year debt and park the proceeds in six
Speaker 4: month treasury bills and earn a positive carry. Now I'm
Speaker 4: not saying that how corporates manage their balance sheet to
Speaker 4: try and earn that incremental return, but if you're looking
Speaker 4: to de risk, if you're worried about what the back
Speaker 4: end of the year might look like, you see that
Speaker 4: environment presented in front of you, you're kind of incentivized
Speaker 4: to finance early. And that's really what drove the first
Speaker 4: six months of the year. Now, we expected come the
Speaker 4: summer that things would start to tape off and we'd
Speaker 4: have a much quieter run into the end of the year,
Speaker 4: and that's actually not been the case. We've actually continued
Speaker 4: at a frenetic pace. And that pace has continued because
Speaker 4: of a very sharp compression in credits breads, and so
Speaker 4: credit spreads at the tightest levels we've seen since they
Speaker 4: think two thousand and five now in the IG index.
Speaker 4: And anytime you get a financing environment where you get
Speaker 4: incredibly tight spreads and as you mentioned James at the top,
Speaker 4: very low or negative or zero new issue concessions, there'll
Speaker 4: be supply. And that's they think what's populated the market
Speaker 4: over the course of the last several months. And there's
Speaker 4: really not been a pre election slow down as yet.
Speaker 4: There's not been a pre election burst of volatility, and
Speaker 4: there's not been a pre election burst of illiquidity in
Speaker 4: the market as well, so conditions remain really robust.
Speaker 2: Got no, if I can step in here, this is
Speaker 2: Arnold Coakuda Bloomberg Intelligence covering banking financials from the credit side.
Speaker 2: So Johnny, you know, like I covered the banking financials
Speaker 2: the a lot of the management teams have talked about
Speaker 2: maybe this is a pull forward right of demand for
Speaker 2: from maybe from next year and stuff like that. So
Speaker 2: is that how you see it? Right? You talked about
Speaker 2: someone was supposed to slow down, but no, we haven't
Speaker 2: seen that. No, really bouts of illiquidity and stuff like that.
Speaker 2: You know, are you gonna call it a pull forward
Speaker 2: or not, or this is this everything looks fine until
Speaker 2: kind of bonuses are paid and we'll see what happens
Speaker 2: with twenty twenty by next year.
Speaker 4: Well, I think the first six months of the year
Speaker 4: was clearly a pull forward or a significant component of
Speaker 4: the financing that we saw was a pull forward. But
Speaker 4: there's also been real growth as well and real economic activity.
Speaker 4: You kind of think about supply that we've seen in
Speaker 4: the energy sector, a lot of that's related to m
Speaker 4: and a supply that we've seen in the utility sector
Speaker 4: that's been related to capex. There's been growth on bank
Speaker 4: balance sheets and that's required a pretty substantial amount of
Speaker 4: bank funding. As we think about how this year has evolved,
Speaker 4: there's been a lot of international financing in the dollar
Speaker 4: market as well, so there's plenty of growth to finance
Speaker 4: as well. I would say that what we're seeing right
Speaker 4: now I don't think is necessarily a pull forward of
Speaker 4: twenty twenty five activity. I think what we'll see post
Speaker 4: election is if conditions remain as they are now, I
Speaker 4: think will then start to see a pull forward of
Speaker 4: twenty twenty five financing plans. And I think in particular
Speaker 4: the frequent finances bank and finance, both domestically and internationally.
Speaker 3: But if you're asking me.
Speaker 4: Does the supply that we've seen this year mean that
Speaker 4: we're going to have a down year next year? I
Speaker 4: think the answer is no. When I look at the
Speaker 4: market for next year, there's a trillion and a half
Speaker 4: dollars that's going to come back to investment grade bond
Speaker 4: investors from one point two trillion of redemptions and three
Speaker 4: hundred billion of coupon payments plus minus, just in the
Speaker 4: US market. I don't believe anywhere near that all of
Speaker 4: that has been pre financed, And actually kind of when
Speaker 4: you kind of think about the staggering sum that that represents,
Speaker 4: and sure, we'll finish this year with the second busiest
Speaker 4: year ever in US investment grade, the second busiest year
Speaker 4: ever in global financing, and similar characteristics in left fin
Speaker 4: If we finish this year in usig at one point
Speaker 4: six trillion, next year, we've got to print one point
Speaker 4: five trillion just for the market to kind of wash
Speaker 4: its face. So I'm not anywhere near thinking that next
Speaker 4: year is going to be a down year. I think
Speaker 4: it's going to be just as robust as this.
Speaker 2: Year has been, got it, So you heard that twenty
Speaker 2: twenty five still going to be pretty busy, so you know, yeah, great, great,
Speaker 2: And then just you talked about this a little bit
Speaker 2: in terms of the constituents, right, you talked about you know,
Speaker 2: the frequent financers coming and stuff like that. But also
Speaker 2: on these management calls we've been hearing about, you know,
Speaker 2: M and A has been rebounding and stuff like that,
Speaker 2: and maybe you know, maybe you know, we need some
Speaker 2: change and some of the regulators and stuff like that.
Speaker 2: But where does kind of the M and A financing
Speaker 2: start coming in? Are we going to start seeing more
Speaker 2: and more of that you think next year? And you know,
Speaker 2: for those who look at this financials versus non financials,
Speaker 2: you know, how should we think about that?
Speaker 4: Yeah, So there's some misconceptions when it comes to M
Speaker 4: and A and its impact on financing markets because a
Speaker 4: lot of people look at M and A over a
Speaker 4: long cycle and they kind of the numbers up and
Speaker 4: obviously it's significantly lower than it was obviously in twenty
Speaker 4: twenty one, and it's actually significantly lower than it was
Speaker 4: in or lower than it was.
Speaker 3: In like eighteen and nineteen.
Speaker 4: For example, and that's because M and A captures all
Speaker 4: sorts of different types of activity in the market overall.
Speaker 4: What we care about INIG obviously we care about the
Speaker 4: broad M and A machine because that makes our company
Speaker 4: more valuable. But when we kind of think about M
Speaker 4: and A from an IG perspective, we care about corporate
Speaker 4: to corporate acquisitions with a significant or all cash component
Speaker 4: to them. And when you look at that time series
Speaker 4: over a long period of time, it's actually been fairly stable.
Speaker 4: When people talk about there being a big rebound in
Speaker 4: M and A, they're really talking about sponsor M and A.
Speaker 4: And when they're talking about sponsor M and A, they're
Speaker 4: really talking about reopening in a much greater level of
Speaker 4: activity in the LBO market in particular, and a lot
Speaker 4: of that I think is going to require better backdrops
Speaker 4: overall in the equity capital markets for IPOs and exits, etc.
Speaker 4: But from an IG perspective, we've had a fairly stable
Speaker 4: and consistent base of issuance every year that's been made
Speaker 4: up of acquisition financing of corporate to corporate all cash
Speaker 4: or significant cash components, and this has been no exception.
Speaker 4: So it's been great to see some M and A
Speaker 4: transactions on the docket. It's great to see some backlog
Speaker 4: and some inquiry and our bridge financing desk is busy
Speaker 4: and active and spending time looking at options and opportunities.
Speaker 4: There's never been more liquidity in the bridge financing market.
Speaker 4: There's never been a greater amount of capital available to
Speaker 4: ig borrowers in the bridge financing market to go and
Speaker 4: do very substantial dream deals etc. Obviously, the regulatory environment
Speaker 4: will prevent there being significant consolidation within industries and probably
Speaker 4: will prevent some international cross border consolidation from taking place.
Speaker 4: But even with the headwinds that have been with the
Speaker 4: existing A disposition towards M and A from a regulatory perspective,
Speaker 4: plenty of volume and plenty of activity. And it's been
Speaker 4: a great addition to the calendar this year.
Speaker 1: So trillion and a half next year, just to quote,
Speaker 1: wash your face, Yes, just to wash your face. You're
Speaker 1: adding some M and A and some other stuff. I mean,
Speaker 1: we're on track to set a new record. Then all
Speaker 1: the time next year.
Speaker 4: You think I don't know about that. I mean we
Speaker 4: came close to two trillion coming out of COVID in
Speaker 4: twenty twenty. I said one point six is will probably
Speaker 4: be more or less what we finish up this year.
Speaker 3: So I think in and.
Speaker 4: Around one point six maybe one point seven as I
Speaker 4: kind of think about next year is a very early look,
Speaker 4: so maybe some modest growth. Look as mentioned like economic
Speaker 4: activities robust, there's a lot of infrastructure financing that needs
Speaker 4: to take place, There's a lot of growth in the
Speaker 4: economy that needs to take place, as well as all
Speaker 4: of the refire that I'm mentioning. So I think we
Speaker 4: can be modestly up and maybe it's one seven five,
Speaker 4: maybe it's ten percent up on this year, but I
Speaker 4: think it will be an up.
Speaker 1: Year, right, But on a net basis, it's still quite small,
Speaker 1: quite small. It's small, and that's going to keep spreads tight.
Speaker 1: It's going to keep usue concessions presumably very slim, is it.
Speaker 4: So I think that the spreading so I would expect
Speaker 4: my personal view around spreads as we think about the
Speaker 4: next kind of fifteen eighteen months is it's going to
Speaker 4: be another low volt year. It's been a very low
Speaker 4: vall year from a spread perspective. There's been plenty of
Speaker 4: corporate activity from an earnings perspective that's helped to ensure
Speaker 4: that earnings are robust and therefore leverage remains kind of
Speaker 4: well contained, so no one's really kind of tripping leverage
Speaker 4: bands and so on. So credit quality in the IG
Speaker 4: market has been very robust. Obviously, a high yield environment
Speaker 4: has been attractive for capital inflows, especially the longer part
Speaker 4: of the curb, especially some of the nuity writers that
Speaker 4: you guys have covered and spoken about and written about
Speaker 4: extensively as well. So I think that we're going to
Speaker 4: get another low vol year overall in credit, so long
Speaker 4: as economic activity remains as robust as it has. You
Speaker 4: kind of think about twenty twenty four, we've only really
Speaker 4: had a couple of instances where there's been some real
Speaker 4: credit spread vol One was in June when we had
Speaker 4: the surprise snap French election called everyone in the US
Speaker 4: suddenly got very very familiar with bundo at spreads and
Speaker 4: what that meant in terms of direction of travel for
Speaker 4: credit and European capital markets, etc. And then the second
Speaker 4: bount of volatility in August after the July payroll reports
Speaker 4: and again coming back to the these defect behind the
Speaker 4: curve et cetera, et cetera. Both of those were pretty
Speaker 4: short lived. So hard to envisage there being much in
Speaker 4: the way of credit spread vole and from a concession perspective,
Speaker 4: I think also a function of overall levels, like generally
Speaker 4: concessions will be low in robust, low vol environments. I
Speaker 4: also think that concessions have structurally been able to move lower.
Speaker 4: I think because of the real significant shift in the
Speaker 4: market structure of investment grade corporate credit that's developed over
Speaker 4: the course of the last five to seven years, particularly
Speaker 4: with respect to liquidity.
Speaker 1: On the spread. Though, I'm still I mean I always
Speaker 1: ask people this, so you probably heard me say it,
Speaker 1: but still a little bit skeptical of the idea that,
Speaker 1: you know, spreads should be this tight. I mean, I
Speaker 1: know the all in yield question argument, you know, just
Speaker 1: look at the yield, don't worry about the spread. But
Speaker 1: that has got people into trouble in the past. And
Speaker 1: if you look at the difference between spreads, you know,
Speaker 1: single aid to double A for example, that's got very
Speaker 1: very tight. So it seems like there's a little bit
Speaker 1: of indiscriminate buying. I mean, I think it's more on
Speaker 1: the leverage side in the IG side, But do you
Speaker 1: not feel that the investors should be paying a bit
Speaker 1: more attention to spreads.
Speaker 4: I mean, it doesn't feel bubbily to me. We've seen
Speaker 4: instances before where the technicals of the market have really
Speaker 4: outweighed the fundamentals and the requirement to invest, and that's
Speaker 4: driven i think spread levels to what historically have been
Speaker 4: maybe artificially tight. This move feels more sustainable, and it
Speaker 4: feels more real, and it feels more rational and reasonable.
Speaker 4: So I'm a little bit less concerned. And by the way, again,
Speaker 4: it's the inverse of what we talked about a moment
Speaker 4: ago about the inverted yeld curve driving issuers to want
Speaker 4: to finance and then part the money in cash. From
Speaker 4: an investor's point of view, the opportunity cost of not
Speaker 4: being invested in an inverted yield curve is also low,
Speaker 4: so they can hide out in short dated instruments and
Speaker 4: earn incremental carry versus longer duration. So I think it's
Speaker 4: a little different in this environment, and I'm less concerned
Speaker 4: about that overall. Look, the reality is you go back
Speaker 4: on very very long time series whenever you see credit
Speaker 4: spreads get to these kinds of levels, and they don't
Speaker 4: get here very often. They bumble around for quite some time,
Speaker 4: and then there's some exogrenu shock that moves them out
Speaker 4: in a material manner. And we could spend like the
Speaker 4: next seventeen hours chatting about what we think that exigent
Speaker 4: a shock is going to be. And I'm ninety nine
Speaker 4: percent confident we won't get it right as to what does.
Speaker 3: Ultimately cause spreads to widen.
Speaker 4: But I think that ordinary course of business, I find
Speaker 4: it difficult to see too many clouds on the horizon.
Speaker 4: There's been periods when we've been worried about are we
Speaker 4: going to tip over into recession? Are we really going
Speaker 4: to be able to have a soft landing. There's been
Speaker 4: periods where we've been worried about the consumer and the
Speaker 4: strength and the resilience of the consumer. There's been periods
Speaker 4: where we've been worried about the labor market, obviously notably
Speaker 4: in the summer. We continue to climb these walls of
Speaker 4: worry very very effectively.
Speaker 3: Got it.
Speaker 2: And then you talked about, you know, when we talk
Speaker 2: about like private credit, that's the big buzzword, you know,
Speaker 2: and then maybe the perception is that's more for levered companies,
Speaker 2: but you know, then again you have these apollo you know,
Speaker 2: talking about creative solutions for IG companies. So how do
Speaker 2: you see you know, folks like that in the IgA space.
Speaker 2: Private credit are they front of these Are they you know,
Speaker 2: another source of financing for you know, some of these
Speaker 2: companies that you might have done bound deals with or
Speaker 2: do you see them as maybe potential buffers right for
Speaker 2: these potential cases of volatility. It's another tool set that
Speaker 2: these companies have to get some financing.
Speaker 4: Yeah, So I think there's plenty of places that private
Speaker 4: credit will grow and will coexist with the traditional banking sector.
Speaker 4: And by the way, we will see in USIG this
Speaker 4: year record volume of issuance from BDC's part of the
Speaker 4: private credit extension that goes on in the marketplace. They
Speaker 4: obviously need to finance themselves. We're providing that there's going
Speaker 4: to be twenty to twenty five billion dollars of supply
Speaker 4: from an industry that from a capital markets perspective, it
Speaker 4: didn't really exist up until kind of the last kind
Speaker 4: of five six years or so in a meaningful way. Obviously,
Speaker 4: private credit has a role to play in the leverage
Speaker 4: finance markets. We've seen that especially for sectors or leverage
Speaker 4: levels the regulated banking sector are unable to lend into
Speaker 4: because of regulatory reform. So that's natural shift of lending
Speaker 4: risk outside of the banking sector. And then obviously there's
Speaker 4: a lot of asset based finance and other types of
Speaker 4: private credit lending that have been taking place. Some of
Speaker 4: them have been on large cap corps who have looked
Speaker 4: at kind of ring fence certain assets. A lot of
Speaker 4: it has been on smaller corporates similarly looking to ring
Speaker 4: fence pool of assets or look at single assets and
Speaker 4: finance them in private markets with a with a credit
Speaker 4: rating that gets to IG for the nic reasons required
Speaker 4: for private credit lenders, but the credit profile looks very,
Speaker 4: very different to what's in the public IG markets. So
Speaker 4: am I worried about the growth in private credit taking
Speaker 4: a bite out of what is traditionally financed in global
Speaker 4: investment grade corporate bond markets. No. I think there'll be
Speaker 4: some portions of balance sheets that will get financed. I
Speaker 4: think very little of it will be direct to investment
Speaker 4: grade corporates, or at least direct to investment grade corporates
Speaker 4: that typically would have otherwise financed in public markets. I
Speaker 4: just think it's fishing in a different pond, and as
Speaker 4: a result, I think it will coexist very very nicely
Speaker 4: with the rest of the credit providers that are out
Speaker 4: there in the public markets, whether it be ig levered
Speaker 4: or otherwise.
Speaker 2: Got it. And then you had mentioned regulation in there, right,
Speaker 2: and some of the regulation pushing some of the lending
Speaker 2: that the banks used to do more to private credit.
Speaker 2: But then you know, buzzle endgame. I'll just throw it
Speaker 2: out there. It's a regulation that you know, not loved
Speaker 2: in the industry. Might see some pullback, or you might
Speaker 2: even see kind of a total upbending, right if we
Speaker 2: get Trump for president. But I think a lot of
Speaker 2: this stuff maybe pertains more to the trading side of
Speaker 2: the business. But how about in IG financing. Is that
Speaker 2: any concerns there any if the regulation were to kind
Speaker 2: of go through, is that really an impact at all,
Speaker 2: like the DCM side and an IG or is it
Speaker 2: more kind of on that trading side and capital intensive side.
Speaker 4: I'm not convinced that it's going to have a significant
Speaker 4: impact on global financing markets, global capital markets, global IG financing.
Speaker 4: Like we'll look at all of our businesses that we run,
Speaker 4: every single business that we look at, we look at
Speaker 4: the capital that gets attributed to those businesses. We look
Speaker 4: at what the return characteristics of those businesses are on
Speaker 4: a standalone and on a related ancillary basis, and will
Speaker 4: allocate capital accordingly. And as the rules change, we'll look
Speaker 4: to allocate capital as efficiently as we can, understanding it's
Speaker 4: a scarce commodity. Wherever we can generate the strongest returns,
Speaker 4: that's what we'll do. And if the rule, if the
Speaker 4: rules shift, then capital will shift accordingly as well. But
Speaker 4: in so far as this impacting kind of the business
Speaker 4: that I traffic in day in and day out, I'm
Speaker 4: far from being expert in all the ins and outs
Speaker 4: of BARSL three end game. But based on the work
Speaker 4: that the teams have done, and I'm not convinced that
Speaker 4: there's going to be a significant impact to our operations.
Speaker 1: You don't worry at all, Johnny, about losing a big
Speaker 1: slug of business to these you know, big asset managers
Speaker 1: who are willing to write you know, billion dollar checks
Speaker 1: to large US corporations that would otherwise have gone to
Speaker 1: the bond market. I mean, they seem to be doing
Speaker 1: this increasingly, and they seem to have more appetite for it,
Speaker 1: and they can see, you know, which credits they like.
Speaker 1: They could just call up the CFO and do a
Speaker 1: deal and sell them on the idea that a direct
Speaker 1: deal is going to be better than whatever they could
Speaker 1: do in the in the open markets, which would expose
Speaker 1: them to less volatility, you know, execute very quickly all
Speaker 1: those things. What extent you're going to lose business from that?
Speaker 4: Well, let's let's talk about what the benefits of intermediation.
Speaker 3: Are in the capital markets overall.
Speaker 4: Because when I kind of think about like global IG markets,
Speaker 4: the deepest, most liquid capital markets in the world, extraordinary
Speaker 4: average daily traded volume, extraordinarily low transaction costs, incredibly easy
Speaker 4: to get in and out of. Overall, the benefits to
Speaker 4: intermediation of any large corporate looking to raise some financing
Speaker 4: is to generate a massive competition between a very large
Speaker 4: number of potential buyers of a standardized security. Global IG
Speaker 4: corporate debt is a standard security. It looks and feels
Speaker 4: the same across markets, across offering documents. It trades on
Speaker 4: an incredibly regular, deep and liquid basis, and as a
Speaker 4: result of that standardization and liquidity, it creates a value
Speaker 4: proposition for an issuer the private markets can't compete with.
Speaker 4: Now I know that there'll be some efforts to liquefy
Speaker 4: private credit and private market credit, but I don't see
Speaker 4: that wedge ever being sufficiently closed that it won't be
Speaker 4: more efficient for a large cap corporate in the US
Speaker 4: to come and ask an intermediary like Goldman Sachs to
Speaker 4: stand in between them and literally hundreds, if not thousands
Speaker 4: of global institutional investors and effectively auction off their securities
Speaker 4: to the best bidders overall. And so unless somebody can
Speaker 4: provide a value proposition that says that a standalone investment
Speaker 4: of a security that's going to be a liquid but
Speaker 4: will price at the same level as a public competed security,
Speaker 4: I don't think an issue is going to elect to
Speaker 4: go down that route. And so from that vantage point,
Speaker 4: and look, I could be wrong, and you might have
Speaker 4: me back on here in a couple of years and
Speaker 4: you may say, hey, Johnny, you got that one wrong,
Speaker 4: didn't you. But I only think I will be I
Speaker 4: think that the market premium for standardized liquid distributed risk
Speaker 4: is significant enough that issuers will be willing to pay
Speaker 4: modest fees for intermediaries to go and find that best
Speaker 4: clearing price.
Speaker 1: You also, at your firm, you have a direct lending operation.
Speaker 1: So to what extent when you talk to an issuer,
Speaker 1: do you do you have that in your you know,
Speaker 1: deck of cards. You know that, by the way, you
Speaker 1: could do a direct lending you know, through Goldman. You
Speaker 1: know this price?
Speaker 3: Does it? Does it? You know?
Speaker 1: Is it all included in the pitch?
Speaker 4: I mean, it's it's it's a growing part of the
Speaker 4: tool kit. Obviously, it's a it's a big growth area
Speaker 4: for us organizationally. But again it's really I think looking
Speaker 4: at a slightly different swimming pool than the one that
Speaker 4: we're all playing in right now, got it?
Speaker 2: Okay, So now you know we've given you a couple
Speaker 2: of layups. We're going to start getting into the reason now.
Speaker 2: So you know, we're all off the sleeves, all right,
Speaker 2: So I gotta ask you so you know, I don't
Speaker 2: know if you'll remember the deal, but it's it's the
Speaker 2: day after the surprise fifty one rate cut Goldman was
Speaker 2: in the market. You guys issued a longer than expect
Speaker 2: you know, usual duration preferred, right, typically it's a non
Speaker 2: call five. You guys did a non call ten. So
Speaker 2: you know, can you kind of give us the thought
Speaker 2: process kind of behind. Maybe not the specific instance, but
Speaker 2: like when you do something, I guess a little bit different, right,
Speaker 2: is it management kind of saying hey, you know, maybe
Speaker 2: maybe the yelds might rise in ten years, So let's
Speaker 2: says that the ten year looks cheap? Or is it
Speaker 2: kind of the investor side saying, hey, you know they
Speaker 2: just cut rates and on duration, Like, can you kind
Speaker 2: of give us some sort of you know, the inner
Speaker 2: thinking you know of how this deal gets formed.
Speaker 4: Man, you want me to pull back the curtain on
Speaker 4: how we make financial decisions at gold Sacks.
Speaker 3: You know you asked me questions going to get me fired?
Speaker 4: Come on, No, it's We have a very robust and
Speaker 4: ongoing dialogue with the treasury team at Goldman Sachs and
Speaker 4: my team in capital markets and syndicate. We provide them
Speaker 4: constant viewpoints from investors market perception, what we think opportunity
Speaker 4: sets are, and that will always intersect with what does
Speaker 4: Dennis want to do, what does Kerry want to do
Speaker 4: from a corporate finance perspective, will always layer that in
Speaker 4: together and we'll look at what the best outcome is
Speaker 4: for the firm overall. In the preferred market. Over the
Speaker 4: course of the summer, there was a clear especially as
Speaker 4: treasury yields were rallying, there was a pretty significant shift
Speaker 4: to longer duration preferences from the buyerbase. That actually created
Speaker 4: an inverted yield curve between preferred or junior sub hybrids.
Speaker 4: The utilities were doing that, howither a non call five
Speaker 4: or a non call ten reset mechanism associated with them,
Speaker 4: And because of that inverted curve, and I think also
Speaker 4: that in conjunction with the view that there will be
Speaker 4: a certain amount of preferred spot we're going to have
Speaker 4: in our capital structure for many, many many years to come,
Speaker 4: I think all of that together drove us towards looking
Speaker 4: at the non call ten segment of the market as
Speaker 4: opposed to the non call five that we'd looked at previously.
Speaker 3: And by the way, if you look at corporate hybrids.
Speaker 4: I mentioned utilities, but also some international hybrids as well
Speaker 4: that come in finance in our markets, also similar subordination
Speaker 4: premium securities. There'd been plenty of supply of non call
Speaker 4: ten product that's out there, So I certainly don't think
Speaker 4: it was an outlier. I don't think it was like
Speaker 4: wildly different from what we might typically issue. Sure, we
Speaker 4: hadn't done a non call ten in quite some time,
Speaker 4: so that made it a little different versus the preferred
Speaker 4: preferred flavors that we had been issuing in the prior
Speaker 4: couple of years. But I wouldn't have said it was
Speaker 4: certainly anything out of the ordinary at all.
Speaker 2: Got it? I got it, okay? And then well how
Speaker 2: about that. You know you have a European you know,
Speaker 2: fig background as well, So let's talk about a little
Speaker 2: bit of a difference I guess between you know, the
Speaker 2: the European Bank eighty one land, where you know, they
Speaker 2: always issue in front of a call, right, it always
Speaker 2: happens like clockwork. But then at the beginning of this
Speaker 2: year we've seen a lot of you know, big US
Speaker 2: banks they kind of let the preferreds, you know, they
Speaker 2: don't call it on first call date, and these coupons
Speaker 2: jumped up really high, right, And so I guess, I
Speaker 2: guess generally, one, can you talk about why there's such
Speaker 2: a big difference between the eighty one European eighty one
Speaker 2: market versus the preferreds and the call and on call?
Speaker 2: And then two kind of what are some of these
Speaker 2: factors that you look at when when when Goldman decides
Speaker 2: whether to refire or preferred or leave it outstanding.
Speaker 3: Yeah, So.
Speaker 4: I would say there's a different perspective from European investors
Speaker 4: writ large versus US investors writ large with respect to
Speaker 4: issue a behavior at call dates on down capital structure securities,
Speaker 4: meaning that European investors generally expect issuers to call these
Speaker 4: securities at the first call date. US investors expect issuers
Speaker 4: to behave economically and commercially with respect to whether or
Speaker 4: not they call the securities or otherwise and so and that,
Speaker 4: by the way, has been around. I've been in this
Speaker 4: business for a long time. That existed coming out of
Speaker 4: the Financial crisis, where you can imagine there are a
Speaker 4: lot of like just pre financial crisis, preferred and cap
Speaker 4: securities issued the floated post initial call in the US
Speaker 4: market and in the European market, any attempts to allow
Speaker 4: those securities to float were met with significant investor pushback.
Speaker 4: So I think just culturally there's a difference between investors
Speaker 4: investor behavior and what is expected of issuers. I think
Speaker 4: when it comes to any issuer making a decision around
Speaker 4: calling an outstanding preferred in the US, you asked me
Speaker 4: to kind of talk about it from a golden sax perspective,
Speaker 4: but I'll just talk about it that generally as to
Speaker 4: how we discuss this without issuing clients, and how we
Speaker 4: advise our issuing clients. Overall, it's obviously got to be
Speaker 4: economic and commercial to call and refile, and that means
Speaker 4: you've got to fully load lots of things in there,
Speaker 4: including the operational costs of going and executing in the market,
Speaker 4: the underwriting.
Speaker 3: Fees, etc.
Speaker 4: But there's also got to be an understanding of is
Speaker 4: there any optionality of having a currently callable preferred security
Speaker 4: on your balance sheet. So an example is that if
Speaker 4: it's a non call five or non call ten that
Speaker 4: then flips the floating post call, it may then be
Speaker 4: callable continuously or quarterly or every six months. There may
Speaker 4: be some real value in having that optionality on your
Speaker 4: balance sheet as opposed to replacing it with something that
Speaker 4: you know you're going to have to live with for
Speaker 4: at least five years, assuming you're replacing it with a
Speaker 4: non call five, which is the shortest that you can
Speaker 4: do from a regulatory perspective, So understanding those puts and takes,
Speaker 4: understanding how the regulatory landscape might develop may mean that
Speaker 4: you may let a security remain outstanding for a quarter
Speaker 4: or two or a six month period or two because
Speaker 4: you're not one hundred percent sure whether or not you're
Speaker 4: going to need it, and if you can call it
Speaker 4: away in three or six months time and you don't
Speaker 4: need it anymore, then that's a much better deal for
Speaker 4: you than replacing it for something that might be out
Speaker 4: there for another five years that you can't do anything about,
Speaker 4: or you'd have to go and do some liability management,
Speaker 4: which will be over very expensive, and then you'd have
Speaker 4: to run that carry cost through overall. That's some of
Speaker 4: the things that go through our minds when we're advising
Speaker 4: clients around to call or not to call, And.
Speaker 2: We did have at the beginning of the year, right
Speaker 2: I guess the rate cut assumptions at the beginning of
Speaker 2: the year were like what six, eight or whatnot? Yep,
Speaker 2: versus now.
Speaker 4: I remember it January twelfth because it was my daughter's
Speaker 4: eighteenth birthday. There were seven rate cuts priced in for
Speaker 4: twenty twenty four yep.
Speaker 2: And a lot of these for those that don't know
Speaker 2: a lot of these prefers right now that are that
Speaker 2: are coming for call, they're kind of you know, three
Speaker 2: months so for you know, based security. So it's really
Speaker 2: the front end really, right, which is where they're flooding
Speaker 2: to on a spread versus the issue at you know
Speaker 2: versus you know spreads versus five and ten years, right,
Speaker 2: So that inverted curve I think kind of screwed around
Speaker 2: with some maybe people thinking about, oh they're going to
Speaker 2: call it an issue and stuff.
Speaker 4: Like that, just made it more complicated. Didn't screw around,
Speaker 4: just made it, just made it more complicated.
Speaker 1: It on the pipeline, Johnny, for next year, I'm interested
Speaker 1: in what you think the drivers are because it looks
Speaker 1: like the US is just going to take care of
Speaker 1: itself with this trillion and a half face wash. But
Speaker 1: the outside of the US, your title is global. Where
Speaker 1: do you travel for opportunity? Where's the big push coming
Speaker 1: from in other parts of the world for issuance?
Speaker 4: Yeah, So I would say that we've invested a lot
Speaker 4: in our European business, and we've had a very successful
Speaker 4: year in our emia credit franchise. I think there's lots
Speaker 4: of opportunities in Europe as we think about playing things
Speaker 4: forward as well. I think there's opportunities just I think
Speaker 4: there'll be natural growth in the financing market. The structure
Speaker 4: of that market is slightly different in terms of of
Speaker 4: what you're able to do. You can do more underwritten,
Speaker 4: fully bought deals that the risk more so than you
Speaker 4: can in the US, or there's more desire from the
Speaker 4: issue aside to do risk transfer transactions. There's the ability
Speaker 4: to do smaller, one off privately placed deals because the
Speaker 4: documentation burden is lighter and easier. And so it's a
Speaker 4: market I think where if we're investing appropriately in good
Speaker 4: risk judgment and good distribution, marrying that with an advisory
Speaker 4: franchise that we have kind of all over the world,
Speaker 4: I think we continue to grow that business. So when
Speaker 4: I think about my own personal allocation of time and capital,
Speaker 4: I'm spending plenty of time in Europe. I think there's
Speaker 4: opportunities there. I don't think it's going to be confined
Speaker 4: to Europe though. I think there'll be plenty of opportunities
Speaker 4: in Japan, that's been a pretty regular visitor to global
Speaker 4: international markets.
Speaker 3: There'll be plenty of.
Speaker 4: Opportunities and probably growing opportunities in Australia as well. That's
Speaker 4: also been a regular fxture in our markets. I'll generally
Speaker 4: spend time in markets around.
Speaker 3: The world that I would view as.
Speaker 4: Like international participants as opposed to going to look at
Speaker 4: like domestic markets around the world. Many colleagues in Tokyo
Speaker 4: who run a very successful Japanese municipal domestic investment grade business.
Speaker 4: I have no business having a point of view on
Speaker 4: that business. But there's a lot of international business that
Speaker 4: comes out of Tokyo where I think I can add
Speaker 4: some value. So that's where I think about my own
Speaker 4: time allocations.
Speaker 1: And what do you mean by Europe? Is it just France, Germany,
Speaker 1: England or is it much broader than that.
Speaker 3: I think it's a little broader than that.
Speaker 4: I think Milan, Madrid, I think the Nordic countries are
Speaker 4: very relevant as well, obviously the Benelux.
Speaker 3: But no, I think there's pretty.
Speaker 4: Broad based opportunities across Europe.
Speaker 1: And is there any particular sector that's focused. I mean,
Speaker 1: we know that you've done a lot of tech deals
Speaker 1: that have been great. Is there anything that you think
Speaker 1: is going to drive it by sector?
Speaker 3: I don't think so. I think it's going to be
Speaker 3: broad based.
Speaker 4: Hard pushed to kind of think about any one particular
Speaker 4: sector that I think will be a stand out in general,
Speaker 4: the way the pie is split across different industry groups
Speaker 4: tends to be fairly stable, fairly consistent. As I mentioned
Speaker 4: this year, like energy has been a kind of a
Speaker 4: bigger fixture. Actually FIG's been a bigger fixture this year
Speaker 4: as well. I would imagine they continue to be growthier
Speaker 4: segments overall. But we'll wait and see and will be
Speaker 4: indifferent and agnostic as to which sector wants to be
Speaker 4: our biggest clients.
Speaker 2: And so for gs, you know, the consumer foray, hasn't
Speaker 2: you know, exactly gone to plan? I guess pull back
Speaker 2: on the kind of lending side there. But I think
Speaker 2: what's underestimated, I think is the funding side, right with
Speaker 2: the deposits, So has that you know, kind of helped
Speaker 2: with some of the financing businesses maybe you know, providing
Speaker 2: some sources of funding for like bridge loans and stuff
Speaker 2: like that, or how has that kind of helped over
Speaker 2: the past few years to kind of help with the
Speaker 2: financing business at all?
Speaker 4: Well, I mean, look at the end of the day,
Speaker 4: in any kind of business where you're looking at NIM
Speaker 4: for any kind of portion of the assets, having the
Speaker 4: lowest cost source of capital against that is going to
Speaker 4: be a creative, and so having a bigger deposit franchise
Speaker 4: and having more of the assets on our balance sheet
Speaker 4: being able to be funded by bank deposits as opposed
Speaker 4: to wholesale funding that we can go and raise in
Speaker 4: the capital markets is going to be more efficient. So
Speaker 4: I think it's been a great benefit to us.
Speaker 2: And then and then so with that, I guess over
Speaker 2: the years, right since, since you do have a bigger
Speaker 2: deposit base, now, do you think that, you know, compared
Speaker 2: to the historical Goldment that had fewer deposits, maybe maybe
Speaker 2: dead issuance for Goldman going forward that could be kind
Speaker 2: of at a lower run rate versus before or.
Speaker 4: I don't know if I have a specific point of
Speaker 4: view on that, because it's really going to depend on
Speaker 4: the growth in the business and the parts of the
Speaker 4: business that grow relative to others. There's obviously portions of
Speaker 4: our business that as they grow, if they can be
Speaker 4: funded by deposits, then great. If they can't be funded
Speaker 4: by deposits, then that will take more of a lean
Speaker 4: on wholesale funding markets overall. But I'm hard pushed to
Speaker 4: give you a strong perspective as to whether or not
Speaker 4: I think that the growth over the next five years
Speaker 4: is going to be more dominated by deposit funding friendly
Speaker 4: assets versus wholesale funding required assets.
Speaker 2: I tried.
Speaker 1: Yeah, we've mentioned the election a couple of times. It's
Speaker 1: on everyone's mind. Obviously, it could be very volatile election.
Speaker 1: It's very close. You know. We talked a little bit
Speaker 1: earlier about how, you know, spreads stay narrow, they bump around,
Speaker 1: and then suddenly something will affect them. They jump a lot.
Speaker 1: How concerned are you at this point that the election
Speaker 1: will cause some volatility event that might close down the
Speaker 1: primary markets.
Speaker 4: I rarely worry, and I'll use some Donald Rumsfield analogies here.
Speaker 4: I really worry about no unknowns, the non unknowns. By definition,
Speaker 4: there has to be some quantum of that no, no
Speaker 4: nun that's in the press. And that's why kind of
Speaker 4: I mentioned earlier. The event that will cause spreads to
Speaker 4: move wider from here will be something that we won't
Speaker 4: be able to guess, because when we look around the
Speaker 4: world and survey all the risks that are out there,
Speaker 4: as we talk about them and we talk about elections,
Speaker 4: we talk about the Middle East, we talk about Russia, Ukraine,
Speaker 4: we talk about French government, we talk about any things
Speaker 4: that are out there that are topical. By definition, they're known,
Speaker 4: but they're unknown, and therefore there's some quantum that's in
Speaker 4: the press. I don't think an election in the US
Speaker 4: has the capacity to create a cessation of activity in
Speaker 4: capital markets. Now, obviously there's three scenarios. There's a clear
Speaker 4: winner that's blue, a clear winner that's red, or there's
Speaker 4: something in the middle that then becomes contested. And the
Speaker 4: amount of time that we have a contested election outcome
Speaker 4: does have the capacity I think to slow down liquidity.
Speaker 4: Formation think just means that there's lower volumes of activity.
Speaker 4: I don't think it necessarily means that there is a
Speaker 4: material weakening in valuations, a material widening in credit spreads.
Speaker 4: I don't think there's going to be much in the
Speaker 4: way of issuance that takes place in that period, because
Speaker 4: the market will be looking for clarity, and that generally
Speaker 4: kind of will create a cessation of activity that may
Speaker 4: last kind of a few days, maybe a couple of weeks,
Speaker 4: But I don't think that it's going to be shutting
Speaker 4: down capital markets overall. Might just kind of keep create
Speaker 4: a little bit of a temporary slow down, and by definition,
Speaker 4: again a lot of the issuance that we're seeing is
Speaker 4: because nobody is expecting to have to go to market
Speaker 4: in that narrow window between election day and Thanksgiving. And
Speaker 4: so if we do have a contestant election and we
Speaker 4: do have illiquidity, we will have issuers sitting there saying,
Speaker 4: largest wait, and.
Speaker 1: That doesn't really matter becau they've done so much already,
Speaker 1: they're prepared for this, They're ready to go.
Speaker 3: I believe that is indeed the case.
Speaker 4: And by the way, it would not surprise me at
Speaker 4: all even if we do get to a scenario where
Speaker 4: it is contested, and even where we are concerned that
Speaker 4: we don't know which way the outcome is going to go.
Speaker 3: It wouldn't surprise me if there's some deals that come
Speaker 3: and price and they do just fine because the demand,
Speaker 3: because I think people will.
Speaker 4: Just say, Okay, I get it, like, we don't know
Speaker 4: exactly where things are going to go, but at the
Speaker 4: same time, I will put a price on risk in
Speaker 4: the capital markets. I'm not really worried about it, because
Speaker 4: it was certainly going to figure it out in the
Speaker 4: next kind of a couple of weeks or so which
Speaker 4: way the country is heading. And so there'll be people
Speaker 4: that will put price on risk in that period.
Speaker 1: Right, Okay. One of my favorite questions to ask underwriters
Speaker 1: is about league tables, and underwriters often tell me they
Speaker 1: don't care about league tables. But then you know, you
Speaker 1: to the guy at the top of the bank and
Speaker 1: they say, actually, we need to be number you know, one,
Speaker 1: two or three to be relevant in these markets. I'm
Speaker 1: just wondering. You know your view of this. Obviously your
Speaker 1: substantial participant in all markets, but where do you have
Speaker 1: to be? And you know how important is a ranking
Speaker 1: to you?
Speaker 4: So when we put out in our first investeday, pre COVID,
Speaker 4: we actually issued KPIs for a bunch of our league
Speaker 4: table businesses, including my business, and we have a KPI
Speaker 4: that we look at a combination of dollar in euro
Speaker 4: underwriting and we exclude obviously self led financings because that's
Speaker 4: not relevant and we want to be number four in
Speaker 4: that business. It's a business where we know that the
Speaker 4: big three commercial banks in the US are going to
Speaker 4: have bigger balance sheets and bigger lending extension than we are,
Speaker 4: and given the size of our relative relationship lending books,
Speaker 4: we're not trying to get into the top three. Obviously,
Speaker 4: it would love it to happen. But realistically, that's a
Speaker 4: bridge too far absent us materially changing the way that
Speaker 4: we think about relationship lending. And so we target that
Speaker 4: spot behind at number four, just behind the big three
Speaker 4: commercial banks, and that's the KPI that we set ourselves
Speaker 4: at Invested Day. And yeah, if people tell you that
Speaker 4: they're not really focused on league tables, then I'm certainly
Speaker 4: not part of that cohort because I know if I'm
Speaker 4: ever not in that position where we want it to be,
Speaker 4: I'm going to hear it from my bosses.
Speaker 1: But do you care more about the volume league table,
Speaker 1: the revenue league table? The wallets share?
Speaker 3: I care about both?
Speaker 1: Okay, so number four in both.
Speaker 3: I care about both, okay.
Speaker 2: Yeah, And to Johnny's credit, right, like I did try
Speaker 2: to look and see sales doing and I think you
Speaker 2: guys are executing on that, right, Yes we are. And
Speaker 2: then I think I think, you know, financing is kind
Speaker 2: of one of the one of the initiatives that right
Speaker 2: Solomon had really talked about it, maybe even have to
Speaker 2: become CEO and stuff like that. So you know, good, congrats,
Speaker 2: I'm doing that, But big question.
Speaker 3: I won't take congrats until we finished the end of
Speaker 3: the year, but thank you.
Speaker 2: All right, big question from the audience, right, I sent
Speaker 2: out to my distribution list, any any questions for for
Speaker 2: Johnny and you know, if you have any, and then
Speaker 2: if we can get a studio drum roll, It was
Speaker 2: all right, how do I get in on the bonds
Speaker 2: and burgers? You know deal?
Speaker 4: The bonds and burgers deal? You know kind of you
Speaker 4: got to set it up, you guys, like know I
Speaker 4: love to cook. If you ever kind of want to
Speaker 4: do a show where I'm kind of showing you how
Speaker 4: to make a good homemade burger and at the same time,
Speaker 4: I'm talking about rates developments and kind of where I
Speaker 4: think the corporate bond market is going to go.
Speaker 3: I'm all in.
Speaker 4: I mean, there'll be an audience of maybe kind of
Speaker 4: ten or fifteen people that I think that will be
Speaker 4: fascinated by that. But if you want to make it,
Speaker 4: I'm down.
Speaker 2: Got I got it sounds good And then uh, just James. Actually,
Speaker 2: so I'm in the studio here with you know, athlete, athlete,
Speaker 2: I guess chef and then also a running right right,
Speaker 2: je You're doing the marathon for the first time.
Speaker 1: So wow, but it's not as impressive as Johnny's powerlifting,
Speaker 1: So we need to get back to that.
Speaker 3: I don't know, that's impressive.
Speaker 4: Anybody who can anyone who can do something that boring
Speaker 4: for that long, I will tell you it is really impressive.
Speaker 4: I don't I don't have the I don't have the
Speaker 4: mental capacity to do something quite as enduring as that.
Speaker 1: I listened to podcasts on the way. But getting back
Speaker 1: to the things, you know, you mentioned known unknowns and
Speaker 1: this don Donald rum Feldian way of responding, Are there
Speaker 1: any known knowns you are particularly worried about? You know
Speaker 1: what keeps you up at night worrying about?
Speaker 3: You know?
Speaker 1: The state of credit markets, which we have discussed are
Speaker 1: very very tight, and we're heading into some potentially very
Speaker 1: volatile events, anything that concerns you.
Speaker 4: So my concern, it was a concern I kind of
Speaker 4: had May June time, kind of went away July August
Speaker 4: when it looked like the economic activity was certainly softening.
Speaker 4: Albeit I think that was somewhat of a forced flag.
Speaker 4: That concern, which I have now probably more intently, is
Speaker 4: that this may be a far from traditional rate cutting cycle,
Speaker 4: rate cutting cycles that get us back to kind of
Speaker 4: a neutral rate, which some people might say, is three
Speaker 4: to three in a quarter right now, at which point
Speaker 4: then we reassess economic activity and move forward from there.
Speaker 3: I think this may be a far from traditional cutting cycle.
Speaker 4: We may get another one or two cuts for the
Speaker 4: remainder of this year, we may get one or two
Speaker 4: cuts in the first half of next year.
Speaker 3: But I think that the.
Speaker 4: Thing I'm really kind of focused on and concerned about
Speaker 4: is that if inflation stops moving towards target, as we've
Speaker 4: taken our foot off the gas, sorry, as we're putting
Speaker 4: our foot on the gas a little bit from a
Speaker 4: monetary policy perspective, then I'm going to put the brakes
Speaker 4: back on pretty quickly. And then all of a sudden,
Speaker 4: the market's thinking that three and a quarter three and
Speaker 4: a half is where the FED stop. They might repress
Speaker 4: that to four to four and a quarter percent, and
Speaker 4: then all of a sudden, that's going to take tenure
Speaker 4: yields out to five percent. And then that's before we
Speaker 4: even start thinking about term premium, which has been largely
Speaker 4: absent this year because the market's been much less focused
Speaker 4: on treasury financing requirement. There's been much less, much less
Speaker 4: focused on auctions and.
Speaker 3: Tails, etc. Because it has been a big deal.
Speaker 4: As we wind things forward into next year, I think
Speaker 4: both of those things could intersect and the yield curve
Speaker 4: could look quite different. So there's anything that I'm worried about,
Speaker 4: it's that.
Speaker 1: Could any of that affect credit fundamentals in IG I
Speaker 1: mean the assumption noise is that this is a solid market.
Speaker 1: Earning is the good. The economy's strung, and then you know,
Speaker 1: if you push people very hard, they'll say, well, actually
Speaker 1: there's a FED backstop as well, so you'll be fine
Speaker 1: whatever happens. Do you think there's any worry that that
Speaker 1: you know there could be downgrades? There could be I
Speaker 1: mean we're talking about a big potential fallen angel in
Speaker 1: Boeing right now, But are there any kind of things
Speaker 1: on the horizon that could push credit quality down in
Speaker 1: an investment grade?
Speaker 3: I mean that scenario.
Speaker 4: I mean, if it's copper with a weak thing of
Speaker 4: economic activity, then yeah. I mean if earnings are coming
Speaker 4: down in that scenario, then that's the negative outcome for
Speaker 4: the US. I describe all of that are low probability.
Speaker 4: I think that's kind of like a ten to fifteen
Speaker 4: percent type probability. Beyond that, the longer that rates remain
Speaker 4: more elevated, the more relevant the interest expense becomes on
Speaker 4: the cash flow statement. Obviously, rates have been elevated for
Speaker 4: several years, there's been an assumption that that's been temporary,
Speaker 4: or there's been an assumption that the levels that we've
Speaker 4: migrated to on average over the course of the last
Speaker 4: six months might be the ones that are around for
Speaker 4: a longer period of time. If that resets another hundred
Speaker 4: basis points higher, then that's going to start to impact
Speaker 4: some financing costs, refinancing costs, interest expense, and so on.
Speaker 4: It will take some time for that to bleed through. Similarly,
Speaker 4: by the way, on the consumer balance sheet as well
Speaker 4: as mortgages get refinanced at higher yields. But those are
Speaker 4: things that I think about.
Speaker 1: Great stuff, Johnny Fine, Global head of investment grade Debt
Speaker 1: at Goldman Sachs. Thank you very much for coming on
Speaker 1: the credit edge.
Speaker 3: It's been a pleasure. Thank you for having me.
Speaker 1: And to Nold Cocuda with Bloomberg Intelligence, thank you so
Speaker 1: much for joining us today. Had a great time freed
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